McDermott contract hangs in the balance

JAKARTA (JP): Construction company PT McDermott Indonesia could lose a contract for the installation of a giant natural gas pipeline linking west of the Natuna islands to Singapore after the House of Representatives found irregularities in the tendering process for the project.

Legislator HA Walid of the United Development Party (PPP) said the special team formed by the House to probe the tendering process had found irregularities in the bidding and that state oil and gas Pertamina and the government should cancel the selection of McDermott.

"The team has recommended that the government and Pertamina disqualify McDermott," Walid told The Jakarta Post.

The 12-strong team comprising the members of the House Commission V for industry, mines and energy decided on the case in a meeting presided over by Walid on Thursday.

The House formed the team to end the controversy over the appointment of McDermott -- a subsidiary of J Ray McDermott SA of the United States -- to construct a 650-kilometer underwater pipeline for the transportation of natural gas from the gas fields in the Southeast China Sea to Singapore for 22 years starting from 2001.

The gas fields are being developed by a consortium comprising three of Pertamina's production-sharing contractors -- Conoco Corp. of the United States, Premier Oil of Britain and Gulf Resources of Canada.

Several legislators criticized the consortium and Pertamina for selecting McDermott, citing its partnership with former president Soeharto's close friend, Mohammad "Bob" Hasan, who has an 18 percent share in McDermott Indonesia.

Pertamina and the consortium maintained that McDermott had won the project in an open, competitive bidding.

After studying the bidding for several weeks, however, the team found that the bidding was "not transparent and in violation of the existing regulation," said Walid.

He said the team found evidence that Pertamina was under political pressure to directly appoint McDermott for the project "before and during the bidding process" prior to the downfall of Soeharto in May last year.

"Head of Pertamina's foreign contractors supervision body (BPPKA) Gatot K Wiroyudo informed the team about the pressure in a recent hearing," Walid said.

McDermott had won the project with the lowest bid of US$335.8 million, beating out other bidders, ETPM of France, Saipem of Italy and Nippon Steel of Japan.

But the team dismissed the contract signed by McDermott and the consortium as imperfect over the fact that it did not explicitly state whether the cost proposed by McDermott was the maximum payable by the consortium and Pertamina to McDermott.

"As such, McDermott is not forbidden under the contract to ask for the reimbursement of additional costs in the future," Walid said.

The team also faulted the contract because Pertamina and the consortium did not require McDermott to provide a bank guarantee in case the contractor failed to complete the job properly.

The team found evidence indicating McDermott had benefited from "insider information" to cut field survey costs, allowing it to propose a much lower bid than its competitors.

Walid said the team was also concerned with the fact that Hasan had shares in the company but it asserted that the partnership was not the main reason behind the team's demand for the cancellation of McDermott's contract.

"The team will still demand the cancellation of the contract even if Hasan has no longer any shares in the company," he said.

Walid said the team's recommendation should be approved by the commission before being submitted to Pertamina and the government.

"The commission can't discuss the recommendation right now due to a recess period. But the commission's head had approved it personally," Walid said.

Walid denied allegations that the cancellation of the contract would affect the country's investment climate.

"On the contrary, foreign investors will praise us for our determination to create a clean business environment," Walid said. (jsk)